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Saturday, March 01, 1975

Land Speculators

Mr. Siegan is the author of Land Use Without Zoningand many articles on the subject. He practiced law for 20 years in Chicago before moving in 1973 to La Jolla, California where he is professor of law at the University of San Diego Law School.

My tale this month is about a much abused species: people who buy and sell land, the so-called land speculators. The moral of my story is that persons earning mon­ey in private industry usually serve necessary and useful roles in the economy.

This is hardly the popular con­ception of land speculators. At some zoning hearings I have at­tended, confessed burglars, bomb­ers and safe-crackers would have received more sympathetic consid­eration. Yet, the speculators were there performing as socially use­ful a purpose as anyone else pres­ent.

Currently that species is much in need of good cheer, for its busi­ness is terrible. With construction at one of the lowest levels in re­cent years, the market in land is unusually poor. While quotes on land prices appear to be escalating, buyers are scarce, and if there is a serious need to sell, prices have to be shaved sharply.

Keeping the land means paying real estate taxes and, for many, exceedingly high interest rates on purchase loans, often 20 to 25 per­cent and more, even for those ob­tained in better days. Credit crunches make nonsense of the notion that land speculation in­variably brings huge profits.

But then, no business venture is free of risk. All businessmen seek to buy low and sell high, and they do not always succeed. This is as true of the shoe store owner as of the farmer, banker and builder. It is indeed difficult to determine the line where investment ends and speculation begins.

Land speculators, however, are thought to be different. Supposed­ly they are wealthy gamblers who exert no labor or effort on the land, and their presence operates only to raise prices. These assump­tions are wrong, as I shall explain.

First, there are many people of middle income, and probably some of lower income, who buy for re­sale vacant lots and acreage. They also invest in groups or buy stock in corporations that purchase land. Considered a hedge against infla­tion, many have preferred this form of investment to stocks, bonds and savings deposits.

Farmers and people who inherit land automatically become land speculators as the prospect of de­velopment appears. Some surveys of speculators in other commodi­ties have shown that housewives, retired persons and people in many occupations and professions are much involved in buying and sell­ing futures.

Second, unlike those in other fields, speculators in land frequen­tly act as middlemen, preparing it for sale to builders. They subdi­vide, rezone, clear title problems, install roads and utilities, each of which can be a lengthy and costly process. They buy large tracts and sell off smaller parcels.

Cities, towns and major devel­opments have been created in this manner by speculators. Houston, Texas, for example, began as a land speculation in 1836 in a low-lying swamp area.

Builders do engage in the same activities, but it requires consid­erable capital and time seldom available to small and middle-sized concerns. Warehousing and proc­essing land can be costly and bur­densome to large builders as well. Consequently many, perhaps most, builders find it advantageous to pay the middleman’s mark-up rather than buy raw land at a lower price.

Third, land speculators provide a price floor for developable land. They create much larger markets than would exist if only builders purchased land, allowing farmers and other owners greater oppor­tunities to convert their proper­ties into cash.

In times such as the present, speculators make up a substantial part of whatever urban land mar­ket exists and prevent the bottom dropping out. By the same token, in better times, their eagerness to unload at a profit serves to hold prices down. Moreover, in ready­ing it for construction purposes, speculators expand the supply of land available for immediate use, reducing the price below what it would otherwise be.

Thus, speculators tend to keep prices from rising too high or fall­ing too low. The higher prices they create at one end of the pro­cess are likely to be more than off­set by lower ones they cause at the other end. They add stability to the market and reduce price fluctuations, thereby lowering the risks of land ownership.

If the reader still condemns the land speculator, he should consider the only alternative: more govern­ment intervention and control. That action would further curtail but, due to constitutional property rights, could not eliminate specu­lation. The result would be less competition and even greater prof­its for those speculators who re­main in the market.

Bernard H. Siegan (1924-2006) was a longtime law professor at the University of San Diego School of Law, libertarian legal theorist and a former federal judicial nominee to the United States Court of Appeals for the Ninth Circuit.

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